Docket: A-408-11
DONALD CHRISHOLM
Appellant
and
HER MAJESTY THE QUEEN
Respondent
Docket: A-410-11
JENNIFER CASS
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS
FOR JUDGMENT
PELLETIER
J.A.
[1]
This
is an appeal from a decision of the Tax Court of Canada dismissing 6 appeals
which were heard together on common evidence. Appeals from that decision were
taken to this Court and were heard together on a common record. The appellants
and the docket numbers are as follows: Donald Cercone (A-405-11), Tom Olivo
(A-406-11), Dan Dair (A-407-11), Donald Chisholm (A-408-11), Brian Barkwill
(A-409-11), Jennifer Cass (A-410-11) (collectively, the Taxpayers). A copy of
these reasons will be placed in each file together with a formal judgment in
each appeal.
[2]
The
appeals arise from transactions in which the Taxpayers purchased shares in one
of three companies from a securities dealer for $1 per share and, within a very
short period of time, contributed them to their individually directed
registered retirement savings plans (RRSPs). The Trustees of these RRSPs
issued contribution receipts in which the contributed shares were valued far in
excess of the purchase price. The Taxpayers then claimed a deduction from
income for their contribution pursuant to paragraph 60(i) and subsection 146(5)
of the Income Tax Act R.S.C. 1985 c.1 (5th Supp.) (the ITA). While
the amounts vary somewhat, for the sake of simplicity I will use $5 as the fair
market value attributed to the shares by the Trustees at the date they were contributed
to the Taxpayers’ RRSPs.
[3]
The
Minister disallowed the Taxpayers’ claim for a deduction on the basis that the
Taxpayers’ RRSPs had acquired the shares for a consideration greater than the
fair market value of the shares at the time of their acquisition, as provided
in subsection 146(9) of the ITA. The Minister disallowed the deduction, in
whole or in part, according to whether the particular shares were a qualified
investment, as defined in section 146(1) of the ITA and added the disallowed
amount to the Taxpayers’ income for the year, pursuant to subsection 146(9) in
the case of shares which were qualified investments and 146(10) in the case of
shares which were not.
[4]
It
is common ground that the shares in one of the companies, Kenartha Oil &
Gas Company Limited (Kenartha), were a qualified investment but the status of
the other two companies, Alliance Explorations Ltd. (Alliance) and Otis Winston
Ltd (Otis), was an issue.
[5]
In
the Tax Court of Canada, the issues arising from the Minister’s assessment were
the fair market value of the shares at the time they were acquired by the Taxpayers’
RRSPs and whether Alliance and Otis were qualified investments. Before this
Court, the only issue was the question of the valuation of the shares.
[6]
At
the opening of the trial, counsel for the Taxpayers indicated that he intended
to call only one witness, whom he wished to have qualified as an expert
witness. The witness, Mr. Fox was examined and cross-examined on his
qualifications and experience. In summary, Mr. Fox has extensive experience in
the area of regulatory compliance for participants in the securities industry
but has no formal qualification in accounting or valuation and no relevant
experience in either of those fields.
[7]
The
expert qualification sought for Mr. Fox was with respect to “how RRSPs are
considered or processed within trust companies and how their value is
determined” (Appeal Book, p. 205)
[8]
It
should be noted here that the Crown had experts of its own who had prepared
expert reports on the fair market value of the shares in issue, which had been
disclosed to counsel for the Taxpayers. While those reports are not before us,
and were not before the Tax Court of Canada, Mr. Fox’s evidence suggests that
they proposed a particular method of determining the fair market value of
shares with which he disagreed.
[9]
In
argument, counsel for the Taxpayers took the position that Mr. Fox was not
being called to give evidence as to the values of the shares in question. Counsel
said that Mr. Fox was being called to give evidence as to how entities who are
trustees for RRSPs comply with the regulatory requirements imposed on them. On
the issue of valuation, counsel said that Mr. Fox would be asked how these
trustees establish fair market value but he would not be asked to undertake
such an exercise himself. The relevance of his evidence, according to counsel,
was that once it was understood how such entities were regulated and how they
established share values, then the Court would be in a position to conclude
that the values assigned to these shares in these cases by the Trustees was the
fair market value.
[10]
Near
the end of counsel’s submissions, the following exchange took place between the
Tax Court Judge and counsel for the Taxpayers:
(Appeal Book, p.
231, l. 15 to p. 233, l.6):
JUSTICE
PIZZITELLI: If I understand you correctly, Mr. Ferguson,
I just want to make sure I am on the same page here, what you are suggesting is
that his evidence with respect to how the two trust companies involved here
would accept a valuation, is relevant, but you are not calling the trust
companies as witnesses here?
MR. FERGUSON: No.
JUSTICE
PIZZITELLI: The witness here has confirmed he hasn’t
acted for the trust companies or reviewed anything from them. Is that correct?
MR.FERGUSON: Absolutely,
yes.
JUSTICE
PIZZITELLI: What exactly would he be testifying to?
MR. FERGUSON: He
is going to be testifying to, Your Honour, how the –
JUSTICE
PIZZITELLI: General industry practices?
MR. FERGUSON: Yes.
JUSTICE
PIZZITELLI: Could you point out to me how the evidence
in general industry practices would be relevant to the specific trust company
practices involved if he hasn’t reviewed them? Are you asking the Court to
assume that the trust companies followed general industry practice?
MR. FERGUSON: I
am asking to assume, Your Honour, that the trust companies are not dishonest or
not in any way negligent. I am asking you to accept the evidence of the general
course as what normally happens, as it did happen. There was no evidence I
don’t think that anybody can bring, that anything else happened.
JUSTICE
PIZZITELLI: Well, direct evidence in the trust companies
can certainly be brought.
MR. FERGUSON: I
understand. That would be – but the trouble is locating the people who did it
and getting anything that might be hearsay, because those people – this is now
eight years ago, Your Honour, so that is part of the problem.
[11]
The
Crown opposed Mr. Fox’s qualification as an expert on share valuation on the
basis that he had neither the training nor the experience to offer opinion
evidence on share values.
[12]
The
Tax Court Judge refused to qualify Mr. Fox as an expert with respect to share
valuations since he had neither the training nor the experience to enable him
to do so reliably. The Tax Court Judge held that while Mr. Fox could give
evidence of industry practice, based on his personal experience (A.B. p. 173,
l. 8), the relevance of that evidence was open to question given that Mr. Fox
had no personal knowledge of operations of the Trustees in this case.
[13]
Following
this ruling, Mr. Fox gave evidence as to industry practice. He testified that,
in the case of publicly traded companies, trustees would value their shares at
the prevailing market price. He also testified that the companies whose share
values were in issue in these proceedings were publicly traded companies. In
cross-examination, Mr. Fox testified that sales on dealer exchanges over the
counter trades were not sales on stock exchanges.
[14]
In
re-examination, Mr. Fox confirmed that there was a publicly accessible record
of share sales on dealer exchanges but he was not asked to produce such records
or to interpret them.
[15]
The
Minister called no evidence and moved for a non-suit.
[16]
The
Tax Court Judge dismissed the appeals. He found that there was no evidence that
the shares of Alliance and Otis were qualified investments as a result of being
traded on a designated stock exchange, as stipulated in paragraph 204(d) which
is incorporated by reference in the definition of qualified investment at
paragraph 146(a) of the ITA. In fact, the evidence of Mr. Fox was that dealer
exchanges were not stock exchanges.
[17]
On
the issue of the fair market value of the shares, the Tax Court Judge rejected
the Taxpayers’ argument based on industry practice. The Court was not prepared
to assume that the contribution receipts issued to the Taxpayers reflected the fair
market value of the shares at the time they were acquired by the RRSPs. The Tax
Court Judge rejected this argument because there was no evidence as to the
practices of the Trustees in question. As a result, the Tax Court Judge found
that there was no evidence capable of rebutting (“demolishing”) the Minister’s
assumption that the fair market value of the shares was the price paid for them
by the Taxpayers.
[18]
Before
this Court, counsel for the Taxpayers (who was not trial counsel) argues that
the Tax Court Judge misunderstood the thrust of the expert evidence to be given
by Mr. Fox. Counsel argues that the issue which Mr. Fox’s report and his
proposed expert evidence addressed was the proper method of assessing the fair
market value of shares traded in a public market. Counsel attempted to persuade
us that the correct method was to rely on the evidence of market trades and not
to rely on any form of analytical valuation such as a business valuation. It
appears that the experts retained by the Minister proceeded on the latter
basis. Those reports were not before us since, as noted, the Minister did not
call any evidence.
[19]
Counsel
cited authority in support of the proposition that the fair market value of
publicly traded shares, absent special circumstances, is the market price, the
price at which the shares trade in the public market: see Canada v. National
System of Baking of Alberta Limited, [1977] F.C.J. No. 1108 (F.C.A.),
[1978] C.T.C. 30, at paragraphs 11-12, Henderson Estate v. Canada (Minister
of National Revenue – MNR), [1973] F.C.J. No. 800, [1973] C.T.C. 636, at
paragraphs 21-22. Counsel argued that Mr. Fox’s evidence was intended to show
that the Trustees of RRSPs acted in accordance with that line of authority. Unlike
counsel at trial, counsel on the appeal did not suggest that, as a result, this
court could rely on the value assigned to the shares by the Trustees to
determine the fair market value of the shares. His approach, as I understood
it, was that Mr. Fox would have been in a position to point to records showing
public trades of the shares in question at the values at which they were
contributed to the Taxpayers’ RRSPs.
[20]
As
I understand counsel’s argument, the Tax Court Judge’s ruling that Mr. Fox was
not qualified to give evidence as to the valuation of the shares is irrelevant.
I agree with the Tax Court Judge that Mr. Fox was not qualified to give expert
evidence as to the value of the shares in question, and I agree with counsel
that this disqualification was of no consequence. Given the fact that Mr. Fox
was allowed to testify as to industry practices in the securities industry as
to the manner in which shares in publicly traded companies are valued by
trustees of RRSPs, I am also of the view that the Tax Court Judge’s refusal to
receive Mr. Fox’s report into evidence did not prejudice the Taxpayers since
Mr. Fox gave his evidence on this point viva voce.
[21]
However,
counsel argues that Mr. Fox’s report should have been received in evidence by
the Tax Court Judge since it contained other evidence which could have been of assistance
to the Court. This argument is difficult to sustain in light of the fact that
Mr. Fox testified viva voce. He gave evidence as to industry practice
which was consistent with what he wrote in his report. However, he was not
asked if there was evidence of trading in the shares in question at the
material time. He was not asked if that evidence disclosed the price at which
the shares sold in those transactions. He was not asked to explain or comment
on the business records which were before the Court at the time he gave his
evidence. On its face, all of this evidence would have been admissible. Its
probative value would have been for the judge to decide but the judge cannot be
faulted for not considering evidence which was not put before him.
[22]
I
might add that the report itself was deeply flawed. The issue before the Court
was the fair market value of the shares. Mr. Fox was to be called to testify
that the industry practice was to value publicly traded shares at the price at
which they traded in the market. Against that backdrop, the report begins with
the following assumption:
In each case, the securities were
contributed at a price that was either the last sale in the public markets, or
was “at-or-between” the quoted bid and ask of the security.
A.B. p.160
In light of the issue in the
appeal, this is begging the question.
[23]
As
a result, the report’s conclusion on fair market value would have been of no
use whatsoever to the Court:
3. Based on the
assumptions and the documents which you have reviewed, were the transactions in
question conducted in accordance with industry standards?
Yes. The securities were swapped
to the corresponding RRSP account at a price that reflected the quoted bid/ask
of that day and were therefore, swapped at a fair market value price.
A.B. p. 165
[24]
Given
the assumption on which it was based, the report could hardly conclude
otherwise. This reasoning was entirely circular.
[25]
As
a result, the Tax Court Judge was correct in coming to the conclusion he did on
the question of the fair market value of the shares. There was no evidence
before him which contradicted or “demolished” the Minister’s assumptions as to
the fair market value of the shares at the time they were contributed to the Taxpayers’
RRSPs. Mr. Fox’s viva voce evidence did not touch on those questions
while his report, even if it had been admitted, would not have been such
evidence.
[26]
I
would therefore dismiss the six appeals with one set of costs.
“J.D. Denis Pelletier”
“I
agree
Johanne Gauthier”
“I
agree
Robert M. Mainville”
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